Consider the economics of home remodeling

During a recent dinner party, the conversation turned to housing costs. Our guest, Randy, remarked that a close friend was going to pay more than $13,000 in property taxes.

Randy was thinking about moving himself, but taxes weren't the only problem. His own home in Northern California had more than tripled in value over the last decade, to about $750,000 -- along with everybody else's. If he wanted something bigger in the same area, he could no longer afford the mortgage.

What he didn't mention were the other costs that most home shoppers often forget: another $100,000 or so in sales commissions, termite repairs, moving costs. Oh, and don't forget the "move-in expenses" such as window coverings, furniture, lawns, plants and trees, irrigation system, patio and cover, fencing, dog run and trash enclosure.

We both anticipated Randy's next question long before he ever opened his mouth. "How much does it cost to do a second story remodel?"

If you're like Randy and have a growing family, you might be asking the same questions. Should you level what you have and begin from scratch? Should you add up or add out? Or should you buy a new lot and build a custom home?

LEVELING WHAT YOU OWN

It might look good on "Extreme Makeover: Home Edition," but this method is wise only on rare occasions. Any time you completely tear down what exists, precious resources are wasted and big, big dollars are lost.

Recycling is no laughing matter when it comes to making more room for your family. A good designer can determine cost-effective ways to repurpose and add to the existing structure. An existing family room area might become part of a new master suite and a previously proposed master bedroom addition may become a less expensive family room addition where the extension of expensive plumbing facilities can be reduced or eliminated.

Only consider leveling most of the structure if there are serious problems with the basic structure, such as major settlement, existing substandard construction or structural damage. 

ADDING ON

The choices are expanding the first floor at ground level or going up or both. Adding a second floor addition is very expensive. It means tearing off and discarding existing and expensive construction elements, such as roof covering, roof framing, ceiling structure, heating ducts, electrical wiring, gas line, plumbing lines and/or sewer vents.

When land is limited, this may be the only choice. But if the existing lot is large enough, going out all the way or at least partially is far most cost-effective. The more of a home that can be recycled, the less expensive the final cost.

CUSTOM BUILDING

There isn't much difference between building a custom home and purchasing a tract home. They both qualify for a higher property tax than an existing structure, and in most building departments building permit costs and restrictions are 10 times more expensive and elaborate for new construction as they are for even the most complex remodel.

An example: Locally, remodeling permits average a few thousand dollars where permits for a custom home can easily exceed $35,000. We remember when a new home in this same market sold for about $12,000. All of the "other costs" that we mentioned earlier still apply to a custom home -- the sales commission on the existing home, the sales commission on the new piece of land, the same moving expense and absolutely all of the move-in costs we previously mentioned.

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